Progressives Beware: Don’t Make These Two Arguments Simultaneously

Recently making the rounds in the minimum wage debate is a working paper released late last December from UMass Amherst economist Arin Dube. With his new research, he argues that, in fact, the minimum wage really does reduce poverty, despite most previous studies having demonstrated no significant effect of minimum wage increases towards reducing poverty. According to Dube’s preferred methodology, for every 10 percent increase in the minimum wage, overall poverty is reduced by 2.4 percent (of the total who are in poverty, not percentage points in the poverty rate).

In my opinion, Dube’s two studies regarding the employment effects of the minimum wage have research design flaws, as were pointed out by Neumark, Salas, and Wascher in their review of said studies. Given this, I can’t help but be initially skeptical of Dube’s most recent (unpublished) paper about the antipoverty effects of the minimum wage.

As I’ve explained before, the minimum wage does not have the significant antipoverty effect that most minimum wage supporters usually assume it to have. This is due to several offsetting factors (mildly higher food prices, negative employment effects), as well as reasons that make the minimum wage poorly targeted in general (most impoverished adults don’t work; most minimum wage workers are not in poverty).

But given these factors, the results of a minimum wage increase on poverty do not need to be zero. Theoretically, the poverty effects are ambiguous. So Dube could be right that on the margin (and in the short run), the antipoverty effects of minimum wage increases tend to outweigh the propoverty effects.

However, there’s an important caveat. As Dube acknowledges in his concluding remarks:

There are a number of outstanding issues that I did not address in this paper. The first set of issues concerns the definition of family income used in this analysis. Following official poverty calculations, my family income definition includes both pre-tax earnings and cash transfers…the estimates here do not capture the impact of minimum wages on non-cash transfers such as food stamps or housing, or on the receipt of tax credits such as EITC.

As I pointed out in my recent video, one of the considerations with a minimum wage hike intended to reduce poverty is that a good portion of the wage increases will be offset by losses in government benefits. Often times, low-wage workers in poverty will be enrolled in one or more government welfare programs, as James Sherk detailed in his congressional testimony on the minimum wage. Because of this, they face high implicit marginal tax rates which offset a significant amount of the wage gains. As Unbiased America illustrates in this post, the effect is by no means negligible.

Why is this important? Well, it has to do with the fact that progressives like to make another argument with regards to the federal War on Poverty. As Joe Biden’s former chief economist Jared Bernstein writes:

The official [poverty] measure stands at 15 percent, but it is widely regarded to [be] woefully inadequate, as it depends on outdated income thresholds and omits both much of the impact of policies intended to fight poverty and income sources of low-income households.

Like many other progressives as of late, Bernstein argues that despite the stagnation in the official poverty rate, the federal War on Poverty has actually been successful when looking at the supplemental poverty rate, which takes into account various government transfers and in-kind benefits, most of which are part and parcel of the War on Poverty itself.

Those of you reading closely will recognize a contradiction between these two positions. On the one hand, some progressives argue that the minimum wage reduces poverty, vis-à-vis Dube’s paper. But many progressives also argue that the War on Poverty really has had some success, because post-tax-and-transfer poverty has declined.

Yet by his own admission, Dube’s widely cited minimum wage research only accounts for the official poverty rate, not the supplemental poverty rate. To be fair, this is the case with other minimum wage poverty studies as well. Nevertheless, Dube’s paper is befallen by the very shortcoming that many progressives go out of their way to avoid with respect to the War on Poverty.

Because of this, one thing ought to be clear. Progressives can argue that the minimum wage reduces poverty, but that the War on Poverty has failed to reduce it. Alternatively, progressives can argue that the War on Poverty did indeed reduce poverty, but that the minimum wage has not been shown to do the same. To be sure, one could find reason to doubt either of these claims. But if anything is certain, it’s that progressives cannot make them both simultaneously.

End term limits? How about a one-term limit?

Writing in the Washington Post, Jonathan Zimmerman endorses the idea of ending presidential term limits. Great idea? Hardly.

Zimmerman’s argument is odd on a few counts. For instance, he suggests that a re-electable president is less likely to be criticized from within his own party, something Zimmerman oddly seems to view as a good thing. Because of course, we should encourage more criticism to be muffled along partisan lines. What a novel idea!

But the crux of Zimmerman’s argument to abolish presidential term limits must be answered in this way:

Does America really need a chief executive with lots of experience in garnishing power for himself? Should the executive branch ever be entrusted year-after-year to the same eminent personality that Americans have developed a convergent affection for? No; it should be just the opposite. A free republican government needs an executive who is less experienced, less relevant, less loved, and less ingrained in the establishment. The president’s reign of power needs to be short, so that he personally stands to benefit less from usurping authority into the executive branch of government.

But my argument goes beyond the defensive. Zimmerman argues that the president should be allowed to continually face the possibility of re-election, so that he always has to answer to the wishes of “the people.” As a libertarian who is cynical of democracy, I would prefer to see more of the contrary. In fact, I would argue that we should ideally have a six-year, one-term presidency. Consider this:

  • We would likely get more honesty from presidents, and less pandering to voter blocs and special interests while in office.
  • Sitting presidents would never have to waste their time campaigning when they should be making governing decisions.
  • There would be no awkward divergence in the credibility of a first-term president vs. a lame duck president.
  • We would be less likely to get expansionary monetary/fiscal policy for the sake of presidential re-election.

(The last point is something that arguably took place under Clinton and Bush II, and the absence of which may have led to the defeat of Bush I. Update: Here is evidence to confirm that Nixon explicitly did do this in 1972.)

This idea is nothing new. In fact, it was proposed and rejected at the Constitutional Convention in 1787. Many fear that a one-term presidency would make any incumbent president totally unaccountable to the people, leaving the president more able to impose a number of undesirable policies. But with the irrational voters that we have, and two-term presidents who have gotten away with so many bad policies in their first terms (e.g. PATRIOT Actindefinite detention), that ship appears to have already sailed.

If anything, I believe that a one-term presidency might pressure voters to give more scrutiny to presidents before they are elected. Furthermore, fewer presidential elections and no presidential re-elections might lead them to pay comparatively more attention to Congress, and possibly make them more likely to pressure Congress to use impeachment. Insofar as a president being unanswerable to re-election is problematic, it can hardly be worse than what we already get with every two-term president’s second term.

In a 1986 New York Times op-ed against the six-year, one-term presidency, historian Arthur Schlesinger Jr. wrote, “it is profoundly anti-democratic in its implications…It assumes that the democratic process is the obstacle to wise decisions.”

Yes, it is anti-democratic, and that’s sort of the point. Democracy is a mechanism for empowering low-information swing voters and the political agents that are most effective at pandering to their rash misconceptions about public policy and social science. That is not to say that no democratic voting processes should exist in a government; but at the very least, the excesses should be curbed by indirect methods of appointment and constitutional limitations.

We really shouldn’t trust “the people” (whoever they are) with the power to re-elect presidents, especially not for more than a second term. Many Americans’ adoration of political personalities on the basis of brand-name familiarity (see: Hillary Clinton) suggests that they shouldn’t be trusted with the power to re-elect ad infinitum; moreover, their scrutiny of presidents and their actions will be better when they aren’t habitually confining themselves to the same familiar name for terms on end, like they have for many members of Congress.

As Friedrich Hayek once wrote in The Constitution of Liberty (1960):

“Perhaps the fact that we have seen millions voting themselves into complete dependence on a tyrant has made our generation understand that to choose one’s government is not necessarily to secure freedom.”

P.S. We need term limits for Congress, too.

fdr term limits

Austrians Are Not Always Deflationists

What many libertarian followers of Austrian Economics might take for granted or assume to be true is the notion that most or all Austrians have a Rothbardian, hard-money view of monetary economics, believing that virtually all price deflation is good, and nearly all monetary expansion is bad. In reality, professional Austrian economists have disagreements and diverging views amongst themselves on this subject.

One group of Austrian economists, called the “Monetary Equilibrium Theorists,” emphasizes the importance of the “demand for money.” That is, money is a good whose supply should respond to changes in the demand to hold it, rather than be arbitrarily limited to a fixed quantity based on natural constraints. This view was articulated by Ludwig von Mises in his Theory on Money and Credit (1912), and was generally shared by Friedrich Hayek. Today, its leading proponents include Steve Horwitz, Larry White, and George Selgin.

These Austrians believe that a free banking system without a central bank would provide competing private currencies in the amount that would be necessary to satisfy the demand for money. That is, when people are feeling less certain and want greater access to liquidity, private banks would augment the supplies of their currency to accommodate this demand, and vice versa. A competitive private currency market would lead to this outcome as banks would keep in check the frequency with which people seek to redeem their notes on demand.

This arrangement would lead to generally stable growth in the product of money supply times money velocity, or M*V. From this, it follows that the least bad policy of any existing central bank would be to pursue this outcome by following an NGDP target, since the equation of exchange posits that MV=PY=NGDP, where P represents prices, and Y is output or real GDP. This equation is true by definition.

It is the belief of MET Austrians that malinvestments come about not solely through the creation of new money, but through the creation of money in excess of the demand to hold it. During a recession (especially a financial crisis), it can be desirable to increase liquidity in accordance with stabilizing M*V in order to prevent unnecessary economic contraction.

The problem only comes about when the central bank is excessive in the amount of liquidity it provides, as the Fed under Greenspan surely was when it held interest rates “too low for too long.” That a central bank is so prone to mistakes is exactly why it should, in my idealist view, be ended and replaced with private currencies.

Now, it is theoretically possible that in lieu of expanding the money supply, prices could fall in order to bring about an increase in the real value of existing money, thereby satiating money demand. However, real world circumstances make the deflation option quite costly, as sticky wages bring about unemployment and fixed debt obligations bring about a wave of defaults.

But is all deflation bad? No. This is where the distinction arises between “good deflation” and “bad deflation.” Good deflation is that which is merely the result of increased productivity, as more goods and services compete for the same amount of money (leaving M*V unchanged).

Bad deflation is that which is precipitated by a shortage of money, whether it’s an outright contraction of available money, or the absence of a money supply increase during a period of elevated money demand (e.g. when people spend less during a recession, and the increased savings in the bank is held as excess reserves rather than lent out). Note how good deflation, being a supply-side phenomenon, does not run up against the constraints of sticky wages or fixed debt obligations, whereas bad deflation does.

So hopefully this has offered some of you a fresh new (Austrian) perspective on the issue of monetary economics. I was originally going to make this a post on my Facebook page, but as I wrote more and more, I decided it would be best suited as a blog post here.

Here’s a good lecture from Steve Horwitz teaching Monetary Equilibrium Theory.

Thoughts on Social Coercion

Libertarian feminist Cathy Reisenwitz (who, by the way, is a nice person) stirred up some discussion in libertarian circles with her recent blog post on the topic of social shaming and coercion.

A favorite topic for Cathy is what she calls “sex positivism” (which inspires the name of her primary blog, Sex and the State). She passionately denounces “slut-shaming” tendencies in society, and I find many a reason to agree with her on that.

One of her recent posts, however, has caused some mildly heated discussion among libertarians discussing social issues. In her TOL blog post, Cathy argues that societal ostracism, including slut-shaming, should be considered unjustifiably coercive. To quote her directly:

Somewhere we’ve decided that the tools the state uses to influence behavior are “coercion” while the tools non-state actors use are cooperation. Where is the justification for this? I didn’t sign a contract with slut-shamers any more than I did with my government. I may find complete ostracism much more oppressive than a small fine. In fact, there are studies which indicate that social exclusion is far more psychologically damaging than property crime.

Knowing libertarian tendencies, it can be seen why many libertarians have taken issue with this. The question of how to define unjust coercion is an interesting one, which I partially addressed in this post.

First off, to properly identify coercion, there must be a defined framework of rights that individuals have, in accordance with their utilitarian pursuits of happiness and efforts toward this end. In the material realm, these are referred to as “property rights;” in the personal/social realm, we call them “privacy rights.”

Having established these rights, we can now identify what coercion really is. Coercion exists wherever someone either uses or threatens force upon the existing rights of another. Furthermore, this coercion can either be just or unjust. In my view, “just coercion” is that which is done defensively in order to protect rights; “unjust coercion” is that which is not defensive of rights, but is instead exploitative against them.

Outside of this, there exist social actions which are “not coercive.” This is where the traditional debate regarding so-called “negative rights” and “positive rights” becomes relevant. The benefits one obtains from the services and social actions of others, for instance, would be considered in the positive realm. Many people, myself included, argue that no one inherently has an entitlement right to said benefits from another.

Therefore, if someone decides to discontinue a business or social relationship with another for whatever arbitrary reason, or to exercise free speech against that person in a critical fashion, such an action, however unwise or insensitive, is “not coercive,” because it does not infringe upon either property rights or privacy rights.

In accordance with privacy rights, there is a useful distinction to be made between “shame” and “harassment.” Shame can be understood as a negative feeling that one experiences upon being disassociated, ridiculed, or criticized by others, for whatever reason. Harassment is ridicule that is so persistent and pervasive that it continues to be presented to the subject, regardless of one’s attempts to retreat from association and escape interaction with the harasser. Critical discourse crosses the line from “shame” to “harassment” only when it goes beyond a simple discontinuation of positive benefits and begins to infringe upon privacy rights.

In conclusion, it is my belief that social actions are only unjustly coercive if they infringe upon the privacy rights of others. As much as I concur that slut-shaming is socially imprudent, it does not become unjust coercion until it turns into outright harassment.

Hopefully this can add some clarity to the debate being had.

NAP, Voluntaryism, and the Use of Force

goodideas

A great many in the libertarian movement have become enamored by deontological, mostly anarchist rationales for their political philosophy. As the title of this blog post suggests, some of the most common rhetoric among libertarians includes justifications such as the “Non-Aggression Principle,” which is the idea that it is illegitimate to initiate force against others.

These libertarians believe that the coercive nature of taxation renders it fundamentally immoral, and that all human interactions should be based upon voluntary association. For this reason, they and their philosophy are often referred to as “voluntaryists” and “voluntaryism,” respectively.

In this blog post, I do not intend to weigh in directly on the merits of deontology vs. consequentialism, anarcho-capitalism vs. minarchism, or any other intra-libertarian dichotomy of this sort. Instead, I want to simply comment on frequent libertarian slogans like the NAP and address how the semantics may be obfuscating the real core of libertarian philosophy.

It is not uncommon for libertarians to reference notions of force, coercion, and voluntaryism in an attempt to describe the motivations for their political beliefs. For instance, they might say:

“The basis for my moral system is the Non-Aggression Principle.”
“I believe that all human association should be voluntary.”
“I want to live in a society that is free from coercion.”

While I do believe that these terms and phrases can be useful depending on the context, they fall short when it comes to capturing the actual essence of what libertarians believe in.

To illustrate this, we must place such concepts as “voluntary” and “force/coercion/aggression” in a different context in order to recognize that they are not the intrinsic root of even the most deontological form of libertarianism.

If, for example, someone were trespassing onto your property uninvited, you could feel justified in garnishing a shotgun in order to “force” him to leave. From the trespasser’s perspective, he might view you as acting aggressively and using “coercion” in order to make him leave your property. He may even note that he is not being given a “voluntary” choice in the matter of whether or not he is allowed to wander upon this land.

What would be your answer to these accusations? Well, it’s your property and he is violating it. Therefore, you are allowed to use force and coerce him to leave. The fact that it’s your property means that your trespasser does not get a voluntary choice in the matter.

The point I am trying to demonstrate is that notions of voluntaryism and aggression are subjective, as they are necessarily conditional upon the framework of rights that are assumed to exist in the first place. One can only argue that an action is unjustly coercive or involuntary insofar as it contradicts a certain set of rights that are presumed to exist for whatever logical reason.

Understanding this is fundamental to understanding what the NAP really means. It is not enough to simply express opposition to the use of force; in fact, doing so would be quite silly. Coercion will exist in society so long as people have claims that need to be enforced. The real question is: Who gets the right to what, and what is the rational basis for vesting this authority?

What libertarians are actually arguing is that individuals have a right to control their own person, as well as those resources obtained through their own productive efforts (which do not violate the similarly processed claims of others). The use of force is appropriate if it is to protect morally justified claims; the use of force is inappropriate if it is to violate said claims.

Do I mean to suggest that the words “force” and “voluntary” should never be used when critiquing government actions? Of course not. In many cases, it is helpful to invoke these terms descriptively, provided that the underlying framework of rights is implied in the given context.

But it is wrong to assume that libertarian philosophy originates from “voluntaryism,” or from an opposition to force and coercion. It does not. Deontological libertarianism really stems from the morality of private property rights; all such NAP notions are secondarily derived only after this premise is established.

Making Sense of the Great Depression

One of the most interesting episodes in economic history to be studied is the Great Depression. And what makes it so intriguing is that the popular wisdom about what caused and prolonged it is so frequently wrong.

I would like to offer a rundown of some of these misconceptions, and explain why they are wrong.

Myth #1: The 1920s stock bubble was a spontaneous feature of unregulated, laissez-faire capitalism.

The reality is that bad central planning within the monetary system is what fueled the stock market bubble in the 1920s.

Prior to WWI, the western nations were operating under the rules of the classical gold standard, without terrible mishaps. During the war, most of the countries departed from the gold standard in order to devalue their currencies and finance war efforts. In returning to the gold standard regime, some countries recognized the reduced value of their currencies and set their gold exchange rates accordingly. The United Kingdom, however, returned to its old exchange rate, ostensibly for purposes of prestige. This caused problems in that it led to an outflow of gold reserves from the UK.

In response to this, the Federal Reserve in the United States decided to lean against this gold outflow from the UK by easing US monetary policy conditions. The expansionary monetary policy resulting from this policy is believed to have contributed to the stock market bubble seen during the mid-to-late 1920s.

As future Federal Reserve chairman Alan Greenspan wrote in 1966:

More disastrous, however, was the Federal Reserve’s attempt to assist Great Britain who had been losing gold…if the Federal Reserve pumped excessive paper reserves into American banks, interest rates in the United States would fall to a level comparable with those in Great Britain; this would act to stop Britain’s gold loss…The excess credit which the Fed pumped into the economy spilled over into the stock market, triggering a fantastic speculative boom.

Myth #2: Loose Fed policy could not have caused the stock market bubble because there was no price inflation during the 1920s.

The reality here is that the productivity boom during this time period concealed much of the monetary expansion that took place. Had there not been this much monetary expansion, there would have been a modest deflation from the productivity boom. Furthermore, even if consumer prices remained stable, asset prices were inflated significantly, as this is where most of the new money in the financial system was put to use.

Myth #3: Herbert Hoover was a laissez-faire, economic noninterventionist.

Contemporary pundits often cite Hoover’s treasury secretary, Andrew Mellon, who advocated that economic policy should be to “liquidate [labor/stocks/farmers/real estate/etc].” In his memoir, however, Hoover was very clear that he did not take this approach.

As Hoover wrote in his memoirs:

But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation.

During his Presidency, Hoover launched a number of modest government efforts to create employment and relief during the downturn. Most disastrous, however, was his agreement with business leaders of the time to keep industrial wages high and prevent any cuts from taking place. According to research from Lee Ohanian, such a policy contributed to two-thirds of the drop in GDP through late 1931, when the agreement finally fell out of favor with business leaders due to sharper deflationary pressures.

Myth #4: FDR’s New Deal policies promoted an economic recovery.

Like his predecessor, FDR enacted a number of public works projects and direct relief programs, albeit stronger and more federalized. One program in particular, the National Recovery Administration, stands out for having substantially thwarted the recovery process. The NRA hampered a fuller utilization of excess capacity by facilitating industrial collusion to keep wages and prices artificially high. According to Prof. Ohanian, this and other misguided efforts delayed a return to full employment by seven years.

Myth #5: The recession of 1937-38 was caused by FDR’s premature fiscal austerity.

Again, the research shows this not to be true. The reduction in the federal deficit was about $600 million, whereas the drop in GDP was around $3.2 billion. Monetary policy has been hypothesized as the contributing factor, but this explanation has also fallen short in terms of its magnitude. The actual culprit behind the first “recession” (as opposed to “depression”) was the Wagner Act that had been passed in 1935. As this pro-union law began to effect greater unionization and pursuant wage hikes, this served to thwart employment more sharply than even the NRA, leading to a full-blown economic contraction and a setback in the road to recovery.

Myth #6: WWII got the United States out of the Great Depression.

While it is true that full employment was restored during wartime, this largely misses the point, as it exemplifies the so-called “broken window fallacy.” The fact that artificial war demands drafted millions of men into war and employed millions of others in the production of war goods does not mean that said resources had been reallocated towards where they would have been most useful in fulfilling actual consumer demands.

After the war, many followers of Keynes believed that stimulus would be needed in order to prevent the economy from relapsing into depression absent the war demands. No such stimulus was implemented, but the economy recovered after a brief post-war recession, owing greatly to the fact that inhibitive New Deal controls and uncertainties were no longer in place.

Has Unemployment Fallen Significantly?

For whatever reason, political or otherwise, I often hear people insist that the unemployment problem is subsiding.

“The economy may be bad, but at least we’ve gotten better.”

“Look, the unemployment rate used to be 10 percent, but now it’s 7.4 percent! We’re moving in the right direction.”

But are we really?

To answer this question accurately, I’ve been spending some time examining macroeconomic data aggregates on FRED. And now I’m going to share with you what I found.

Here’s that headline unemployment rate (blue), with the “natural” unemployment rate (red). As you can see, U3 has been declining:

unemployment, headline and natural (modified)

(Update: For those of you less familiar with macroeconomics, the red line approximates a “natural” rate of unemployment in a healthy economy.)

Furthermore, monthly job growth has been in positive territory:

payroll growth (modified)

So the economy really is digging its way out of this hole, right? Not so fast.

One important factor that must not be overlooked is population growth. Just eyeballing this next chart, we can see that the total US population is netting about 160,000-220,000 new people every month:

population growth

But this chart shows growth in the total population. In reality, not everyone in the entire population is prone to work, or even falls under the working-age category. So the relevant population would be those who are of working age (15-64). Even still, only about two-thirds of the people in that category are typically employed.

To obtain a graph that thoroughly accounts for these factors, I did several things. I found a population metric for everyone ages 15-64, and I found the metric for total payrolls and subtracted out those who held jobs at 65 and older. I scaled down the population data (red) to about 67 percent of the actual, in order to account for the longer-term nonparticipation trend and align it with the payroll (blue) at roughly the natural rate of (un)employment. Here is what I got:

payroll and population, 15-64 (modified)

As you can see, the Great Recession is characterized by a large and persistent employment gap. However, it does seem that the gap has slightly contracted. In 2010, it was around ten million; in 2013, that number is about seven million. That means we’ve had some modestly helpful job growth, right?

Well, that’s not the whole picture.

Before I even factored out those who are 65 and over, I had made a similar chart juxtaposing payrolls and population for everyone age 16 and above:

payroll and population, 16+ (modified)

The two trend lines here run much more parallel. This goes to show that much of the gap decrease in the 15-64 chart is through attrition of the working-age population as the earliest baby boomers turn 65. We can observe this in the next chart, which shows the semiannual growth rates of payroll (blue) and working-age population (red):

payroll and population growth, 15-64 (modified)

But there’s more. One of the biggest factors behind the illusory decline in headline unemployment is a steadily decreasing labor force participation rate as jobless workers have become discouraged. To remove the effect of nonparticipation from retirement, I narrowed this next chart down to the ages of 25-54.

participation rate, 25-54 (modified2)

Also helpful is the employment-population ratio, which is basically the number of people employed divided by the population:

employment rate, 25-54

That by itself should be enough to show that employment has not significantly improved. By syncing the employment-population ratio with the labor participation rate, this final chart shows precisely what is misleading about that original headline unemployment chart:

employment rate and participation, 25-54 (modified2)

Well, there you have it. The Great Recession has had a very slow and protracted “recovery,” albeit with a declining headline unemployment rate. After poring over the relevant data, it seems the dropping unemployment rate is mostly an illusion, as the post-recession economy has been characterized by: (1) job growth that is only slightly above population growth, (2) stepped-up rates of retirement from the maturing of baby boomers, and most significantly (3) decreased labor force participation rates among the core working-age population, as many of the unemployed are discouraged and have ceased looking.

So, has unemployment fallen significantly? Answer: It really hasn’t.

Update: There is probably a secular downward trend in labor force participation that predates the Great Recession. Including it might make the full-employment threshold look something like this:

participation rate, 25-54 (trend)

Ostensibly, this reduces the cyclical component of the labor participation decline (and its contribution to declining headline unemployment), albeit not by very much.